IKAR in Mass and Industry Media

Sugar suppliers in high stakes battle as prices slump

Reuters

LONDON, April 4 (Reuters) - Top sugar exporters Brazil and Thailand are raising production to cut costs in an effective price war, aggravating an already heavily oversupplied global market as values slide to the lowest levels in over 2-1/2 years.

Farmers have increased cane plantings in the centre-south of Brazil, the world's top sugar producer and exporter, to enable mills to operate at maximum capacity utilisation, traders said.

Mills in Thailand, the number 2 sugar exporter, have invested in additional capacity and crushed cane as quickly as possible this season to cut costs.

But these actions will raise nearby supplies in the face of depressed raw sugar prices, now trading at the lowest levels since July 2010 and not far off the production costs of the most efficient mills.

Traders believe sugar prices will fall further under the weight of expected Brazilian and Thai supplies, ample Indian production, and expectations that surpluses from Mexico will enter the international market soon.

Benchmark raw sugar futures on ICE hit 17.47 cents per lb on Wednesday, a more than 2-1/2 year low. May futures were up 0.14 cent or 0.8 percent at 17.64 cents a lb on Thursday.

"We think that current prices (below 18.00 cents a lb) are certainly well below the cost of production everywhere in the world excluding the 'big three' exporters - the centre-south of Brazil, Australia and Thailand," said Robin Shaw, analyst with brokerage Marex Spectron.

"In the latter countries the situation is complicated by the fact that the cost of production can be significantly reduced if you use all your industrial capacity."

Shaw said he believed mills in the centre-south of Brazil had probably cut their cost of production to around or even below current prices.

"We would not be surprised to see Thailand following the same rationale," he said.

Brazil's raw sugar production costs are estimated at some 17-22 cents a lb, depending on the age and efficiency of individual mills.

Mills in Brazil have increased investment in cane acreage so that they would have plentiful raw material to crush, after a few years of lean supplies due to adverse weather.

"Brazilian mills are hoping that by running their factories for a longer season, they are reducing their costs of production," a senior analyst said.

"They made sure there is enough cane in the fields ahead of the start of the harvest."

Brazilian mills struggled to make profits over the last few years as they lacked sufficient cane to operate their plants at full capacity.

In Thailand, the sugar industry has invested in additional production capacity and has crushed higher than expected cane output as the harvest enters its final stages.

Traders estimated that nearly all of the Thai cane crop had been crushed, possibly some 97 million tonnes so far, above forecasts at the beginning of the year.

"The Thais had extra capacity, so they crushed very fast," said Jonathan Kingsman, head of agriculture of data and information provider Platts.

Sergey Gudoshnikov, a senior economist with the international Sugar Organization (ISO), said rising freight rates could erode Brazil's competitive edge against Thailand in some Southeast Asian sugar markets.

RUSSIAN ACREAGE DOWN IN 2013

As the Brazilian industry boosted capacity utilisation, it reduced production costs and became increasingly competitive compared with origins such as Russia.

A weakening real currency has also increased the profitability of the Brazilian sugar sector as exports are priced in dollars.

Russia had moved towards self-sufficiency in sugar in the last few years as its production costs grew more competitive with Brazilian mills which struggled to find sufficient cane to crush.

However, now Russia, which was the world's top raw sugar importer a decade ago, risks increasing its import requirement from traditional supplier Brazil, traders said.

They estimated that Russia's beet acreage in 2013/14 would fall 15-20 percent year on year, creating additional land for grain sowings.

"We think the Russians had over-expanded (sugar output) beyond the levels that they could cope with," the Western analyst said.

"By reducing the beet acreage, they expected to be able to produce similar amounts through greater efficiencies, and convert the extra land to wheat or corn."

Beet acreage in Russia in 2013/14 will decline by 20 percent year on year, Russia's Institute for Agricultural Market Studies (IKAR) said last month.

04.04.13

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